Thursday 12/12/19

1. In MACRO & OIL NEWS, US interest rates stay unchanged, UK polls cast doubt on a Conservative majority and Saudi Aramco has a solid market debut
2. In RETAIL NEWS, Home Depot announces a downbeat outlook, Amazon/Deliveroo faces potential competition hurdles, Lululemon chases guys, Inditex gets even better and Majestic eyes more outlets
3. In INDIVIDUAL COMPANY NEWS, Nestlé wants to offload Häagen-Dazs, VW invests in a self-driving start-up and Stagecoach’s founder steps down
4. In OTHER NEWS, I explain why we hang mistletoe at Christmas…

So US interest rates stay the same, the Conservatives don’t look like winning a majority and Saudi Aramco’s debut is a good one…

Federal Reserve keeps interest rates steady, sees long pause (Wall Street Journal, Nick Timiraos) shows that the Fed has kept interest rates unchanged after cutting them for the last three meetings. It voted 10-0 to leave them unchanged in the first unanimous vote since May and indicated that they will remain there for the next year. They remain in the 1.5% and 1.75% range. Fed chief Jerome Powell hinted, however, that they would be prepared to intervene again if the need arose. * SO WHAT? * The Fed put interest rates up four times last year in the belief that strong economic momentum and low unemployment would cause things to overheat and push inflation higher. However, it had to hit reverse this year when it realised that wasn’t going to happen because of the global economic slowdown and ongoing US-China trade tensions. I suspect that President Trump will continue to intensify the pressure on “Jay” Powell to cut rates in order to make him look good in the presidential election run-up because, as a general rule, when rates are cut, markets go up – and when markets go up, people feel richer and if they feel richer, they spend and if they spend companies grow, and if they grow they employ more people which leads to a tighter labour market, which leads to higher wages, which leads to more spending…etc.

Then in Tory hopes of decisive majority in doubt as voters head to polls (Financial Times, George Parker) we see that the momentum of the Conservatives is slowing down as we head into the general election today (I’ve written a report on which parties tout which policies which you can access HERE. The idea of this is to make it easier for you to compare policies side-by-side). Boris Johnson’s lead had been convincing but has narrowed over the last week or so, lessening the likelihood of the majority that he craves to push through his policies. Polling stations open at 7am this morning and close at 10pm tonight for Britain’s third general election in four years. A hung parliament would be a nightmare for all concerned as no-one would be able to achieve what they want as they all pursue their individual agendas.

Aramco ends its debut trading day as world’s biggest business (Daily Telegraph, Ed Clowes) highlights a strong first day of trading as the oil giant’s share price shot up by 10% yesterday on the Tadawul stock exchange. Some observers believe that strong pressure by the Saudi Royal family on domestic investors was the reason for this sharp rise and caution that the market itself is often open to manipulation and insider trading. * SO WHAT? * Supporters of the IPO will say that this debut has proved the doubters wrong and that their bleating is just sour grapes. However, we will see what the true value of the company is once this initial froth has calmed down. Having said that, the Crown Prince will be doing all he can to make this work, so I am sure that there will be a lot of support for Saudi Aramco in the background. For the moment, though, it has been a success!

Home Depot paints a downbeat picture, Amazon’s investment in Deliveroo comes under scrutiny, Lululemon targets menswear, Inditex gets even better and Majestic eyes more outlets…

Home Depot gives cautious outlook for 2020 (Wall Street Journal, Sarah Nassauer and Allison Prang) highlights a cooling in the American DIY store’s forecasts for next year as it expects a slowing economy and believes that its own “home improvements” will take time to turn into sales gains. Home Depot has enjoyed strong growth over the years as a strong housing market and low unemployment have powered sales growth but the company now says that momentum is slowing down. The company is currently investing $1.2bn over five years on its supply chain and distribution centres to automate a number of processes but it says that the benefits of this will take some time to filter through. * SO WHAT? * Given that the company has missed same store sales targets for the last four quarters, it’s probably just as well that it brings down expectations. After all, it has outperformed rivals like Lowe’s and its share price has risen by about 18% over the past year. Interestingly, it turns out that Americans are staying in their homes longer, which makes them more willing to invest in improvements – so there is still some growth to be had!

In Competition warning over Amazon and Deliveroo (The Guardian, Sarah Butler) we see that Amazon’s investment in a 16% stake in Deliveroo in May is attracting interest from the Competition and Markets Authority (CMA) which could ultimately result in Amazon being forced to sell or reduce its stake in the food delivery company. The two companies have been given five days in order to address concerns from the CMA or a full investigation will be triggered that could take up to six months. The main worries centre around the move stifling competition in food delivery as well as grocery delivery given how strong they both are in their respective areas. * SO WHAT? * The CMA has form in getting its hands dirty in these things before – BSkyB was forced to sell over half of its 17.9% stake in ITV and Ryanair was told to cut its near-30% stake in rival Aer Lingus, for instance – so its threats aren’t empty. We’ll just

have to wait and see if the CMA will be satisfied by the answers they get.

Lululemon leans into men’s apparel as segment expands (Wall Street Journal, Charity L.Scott) shows that, having become a master at selling premium yoga gear to women, the company is now turning its focus to men. Chief exec Calvin McDonald said yesterday that total revenue for menswear grew by 38% in the third quarter and reiterated the company’s goal to double the size of the men’s business by the end of 2023. * SO WHAT? * Sounds like a plan! Men like stretchy stuff as well! OK so you do pay through the nose for some of their stuff, but the company continues to go from strength to strength – its share price has doubled over the past year alone! The company wants to broaden its “athleisure” reputation and move into other categories like personal care products. Clearly, you never know whether this broadening will actually work, but I think that Lululemon has the potential to make a decent go of it. It is a premium brand that doesn’t really do much in the way of discounts (which helps to keep the exclusivity factor) and it appeals to an active customer who is after a quality product. Let’s hope it doesn’t overstretch itself…

Profits surge turns Inditex into cashflow ‘juggernaut’ (The Times, Ashley Armstrong) highlights the continued success of the world’s biggest clothing retailer after investment in radio-frequency identification technology that tracks clothing stocks in shops very accurately has helped to make the company even more efficient. The owner of Zara, Massimo Dutti and Pull & Bear reported a strong performance with net profits, net cash and sales all up. * SO WHAT? * This company just continues to impress. Being able to design and stock items in super-quick time versus many of their rivals is now enhanced by technology that keeps a very tight rein on inventories, making the whole process even more streamlined. This company always innovates and tries to stay ahead of the trends – and its efforts are bearing fruit, as these results show.

There’s positive news in New outlets plan after Majestic sale (The Times, Dominic Walsh) as the wine retailer is set to open more stores after the £95m acquisition of the chain by Fortress Investment Group completed yesterday. Returning exec chairman John Colley mentioned St Andrews, Marlow and Henley as potential sites and added that early signs of Christmas trading have been promising.

Nestlé wants to sell its Häagen-Dazs brand, VW invests in a self-driving start-up and one of Stagecoach’s founders steps down…

Nestlé to sell Haagen-Dazs ice cream business for $4bn (Financial Times, Leila Abboud and Arash Massoudi) heralds a sale of the well-known US ice cream business for $4bn in cash to Froneri, which is backed by private equity group PAI Partners. * SO WHAT? * This is just the latest divestment from Nestlé as it continues the process of streamlining its brand line-up. It’s also interesting to note that private equity firms seem to be benefiting from the current trend of consumer goods giants selling off underperforming assets (e.g. KKR bought Unilever’s spreads business for €6.8bn in 2017).

Volkswagen invests in Aeva self-driving vision start-up (Financial Times, Patrick McGee) highlights an interesting development for VW as it made an unspecified investment into Aeva, a start-up founded by two Apple engineers which claims to have invented a new lidar (a light detection and ranging sensor) that is cheaper and more efficient than current options. Lidars help the car to know the distance and depth of objects by creating 3D maps. Current versions

are big and unweildy (and can cost thousands of dollars) while Aeva’s is on a single chip with no moving parts and can be fitted next to a car’s lights – for the price of $500. * SO WHAT? * Many believe that lidar tech is key for autonomous driving but Elon Musk has scoffed at the tech, preferring instead to use cameras and radar on his autonomous vehicles – but VW Autonomy chief Alex Hitzinger said that Musk’s conclusion “is based on the extremely high cost of lidar, but if the cost isn’t high any more then the argument falls away”. Nice move by VW by the sounds of it…

Stagecoach founder Sir Brian Souter to step down (The Guardian, Gwyn Topham) marks a historic development for the bus company after its billionaire founder, Sir Brian Souter, said he’d step down at the end of the year but remain on the board as a non-exec director (NED). His sister and co-founder Ann Gloag, will also retire from an NED position at the end of the year. * SO WHAT? * This spells the end of an era, although the brother-and-sister combo will still be shareholders in the company. Given the potential upheaval in transport that the next government may make and the loss of some of its train and overseas interests – not to mention that they are both getting on a bit – it seems like a good enough time to leave things to the existing management team. Mind you, if they muck things up, they may well make a return 😉 like Julian Dunkerton did to Superdry and possibly Ray Kelvin to Ted Baker.

And finally, in other news…

Given our approach to Christmas, I thought you might be interested in This Is Why We Hang a Mistletoe at Christmas (BestLife, Owen Duff https://tinyurl.com/wn4owkf). Well I never knew that!